Frank,
I tend to agree with your thinking, but my wife is all in favor of saving the taxes. And I can also see the advantages of completing the exchange. It really is a tough call in my mind.
So I am working with a realtor and I have made some offers. It looks like I can get some reasonable deals on a long-term basis. I am generally a buy and hold type investor, so hopefully these deals will work out okay, at least in the long run.
Thanks for your advice and insight. You are a great asset to this forum. I always read your postings carefully.
I am trying to find replacement properties to complete three exchanges. I am trying to figure out a way to avoid paying full price for my replacements. One of the major impediments is that I have to take on some debt to equal the debt on the relinquished properties.
Is there any way I can make all cash offers in this situation? I will be buying 5 or 6 properties.
The offers I make will be approximately 2/3 cash and 1/3 debt. But I am thinking I could get better deals if I could offer 100% cash with no financing contingency.
Posted by Frank Chin on July 19, 2003 at 08:35:55:
Hi Randy:
Many folks posts questions here during the exchange - not before. At this point, you don’t have many choices, and as JT points out, “you’re a motivated buyer”.
The best way is to plan the whole scenario out before hand. This usually means locking up the buy side before you sell.
My wife was a sales agent once. She tells me “buying right is hard”, “selling right is easy”. She explains that selling is more a functions of the price YOU determine. “BUYING RIGHT” is a function of the price the seller deteremines, meaning you’ll have to look at many BAD deals to find the GOOD one. Right now, you don’t have the luxury of passing up bad deals.
In your case, because you want to do a “one to six” exchange, it would make sense to do L/O’s to lock up good replacement properties, beforehand, negotiating longer option excercise periods.
Under my wife’s theory, if you can lock up replacements at 70% FMV, then it’ll give you flexibility to unload yours at 80%, 90% FMV, quickly, and still be ahead.
In fact, you can do exchanges in other ways, besides doing a non-simultaneous excahnge thru an intermediary", which is more well known and talked about method.
I am NOT a 1031 pro… never done one, in fact. Dealer issues keep me from them…
Why couldn’t you secure short-term financing, in the form of a note, for the amount of indebtedness that will make up your offer. Having pre-control of those funds can preclude inserting a financing contingency into the contract. Following the closing you can refi the short-term note out of the deal with a mrtg.
The fact that you are securing debt for a portion of the purchase has really nothing to do with whether you insert a contingency into your contract. Let’s face it, all cash-out closing are all cash deals, as the seller could care less where the funds are coming from anyway. You simply leave the contingency out, and you insert all cash…
One of the major downfalls of a 1031 deal is that far too often buyers will overpay due to the fact that they are what we call “motivated buyers”… to the extreme. The penalty of NOT doing the deal, far out weighs the factor of paying a little too much, and I personally don’t like that scenario… as a buyer.
Not sure if all this is solid, but it seems that if I were in your situation this is how I would approach the issue of contingencies… and possibly downplay the 1031 circumstances.
Frank,
Yes, it is late in the game, but that is where I am and I am just trying to figure out the most profitable route to take. It looks like my choices are to work with a realtor and pay full price or forget the exchange and pay the taxes.
I need to buy about 600k of properties or pay 70k in taxes. I have about 380k in cash. So I could pay the taxes and use 310k to find good deals. I have about a week to identify my replacement properties for part of the exchange (200k).
The advantage of doing the exchange is that I will have an extra 70k to put into the properties. I might also benefit from some market appreciation because I am buying sooner. And I will still have over 300k equity in the new properties that I can use to acquire better deals going forward.
What do you think? Does it make sense to pay full price in this situation? What would you do?
JT,
I like your idea but I need some help on the details. I guess what I don’t quite get is where would I get this financing and how would I tie it into the exchange. One possibility would be a short-term owner carryback, say 30 days. That should satisfy the 1031 requirements but would it make my offer any more attractive than bank financing? I suppose it could result in a faster closing with the seller getting 2/3 of his money right away.
Do you see any other way that I could secure this temporary financing and have it tie into the exchange? I am concerned about the documentation I have to submit to my intermediary. I believe it has to show the financing as an integral part of the exchange. No?
Frank,
I tend to agree with your thinking, but my wife is all in favor of saving the taxes. And I can also see the advantages of completing the exchange. It really is a tough call in my mind.
So I am working with a realtor and I have made some offers. It looks like I can get some reasonable deals on a long-term basis. I am generally a buy and hold type investor, so hopefully these deals will work out okay, at least in the long run.
Thanks for your advice and insight. You are a great asset to this forum. I always read your postings carefully.
Posted by Frank Chin on July 21, 2003 at 03:25:21:
Randy:
I vote for buying deals with 310K cash, and take as much time needed to make the best deal.
Paying full price usually means paying more than FMV. If you buy 600K at full price in a property, then its usually 110% FMV, or about 60K overpriced. You already threw away 60K of the 70K.
With 310K cash - buy $1 million in properties at 900K, just 10% below, and you’re already ahead by 100K.
Yep, I was in the same shoes as you two years ago and paid the taxes. Try holding on to the 70K may cause you to make very stupid deals.